DIGEST: A lawyer may enter into a
fee agreement under which the client will be charged interest on
unreimbursed expenses of litigation to cover interest paid to the
bank from which the lawyer borrows to pay the expenses

CODE: DRs 2-106(D), 5-103(B)(1),
5-104(A)

QUESTION

A lawyer represents plaintiffs in
personal injury actions on a contingent fee basis. The lawyer
advances funds to pay expenses of litigation (e.g., court costs,
expert witness fees and other disbursements). The lawyer borrows
from a bank to finance these disbursements. May the lawyer charge
clients interest on funds advanced to pay litigation expenses at
the rate charged by the bank?

OPINION

Loans from a lawyer to a client
are generally restricted, see DR 5-104(A), and in litigation,
loans for most purposes are flatly forbidden. As an exception,
however, DR 5-103(B)(1) provides that "[a] lawyer may
advance or guarantee the expenses of litigation . . . ."
Although the exception does not explicitly address whether a
lawyer may charge interest on funds advanced for this purpose,
other ethics committees have uniformly concluded that, subject to
limitations, a lawyer may do so. See Ala. RO-88-88 (1988); Fla.
Op. 86-2 (1986); Ga. Op. 92-1 (1992); Haw. Op. 32 (1992); Ill.
94-6 (1994); Iowa Op. 81-7 (1981); Md. Op. 94-24 (1994); N.J. Op.
603 (1987); Va. Op. 1595 (1994).

We agree, subject to limitations recognized in the above-cited opinions. First,
the interest charged may not exceed the interest charges actually incurred by
the lawyer. Second, the provision must be explained clearly to the client in
advance and agreed upon by the client. Finally, the method by which the rate
of interest will be determined must be stated in a writing provided to the client.
See DR 2-106(D) ("Promptly after a lawyer has been employed in a contingent
fee matter, the lawyer shall provide the client with a writing stating the method
by which the fee is to be determined, including . . expenses to be deducted
from the recovery [ILLEGIBLE WORD]"): see also N.Y. City Bar Op. 1993-2
(1993).

Although this Committee does not
address issues of substantive law, we note that Rules of Court
adopted by the Appellate Divisions of the Supreme Court of the
State of New York may further restrict the proposed practice of
charging interest on disbursements in personal injury actions.
Rules of Court governing contingent-fee representation in
personal injury actions require the filing of retainer statements
and prescribe their contents. Among other things, the Rules
provide that the lawyer's percentage of the amount recovered
"shall be computed on the net sum recovered after deducting
from the amount recovered expenses and disbursements for expert
medical testimony and investigative or other services properly
chargeable to the enforcement of the claim or prosecution of the
action." McKinney's 1996 Rules of Court, sec. 691.20 (22
NYCRR sec. 691.20). The lawyer should consider whether the
proposed conduct is permissible under these Rules.

CONCLUSION

Subject to the limitations
identified above and any applicable legal restrictions, the
Committee answers the question in the affirmative. We conclude
that a lawyer may charge clients interest on funds loaned to
cover expenses of litigation.